Forex traders are used to seeing the term ‘spreads’, ‘difference’ and ‘differential’ when trading forex and currencies. With all the different jargons and names, which can be confusing, we thought that it would be helpful to traders to find out exactly what a spread is.
A spread is used in the foreign exchange market with prices represented as currency pairs or exchange rate quotation. That is, the desired relative value of one currency unit which is denominated in the units of another currency.
Bid and Ask Prices
A ‘bid’ is an exchange rate which is given to the trader who intends to purchase a quote currency. Whereas selling is called ‘Ask’, the lowest price that a currency pair is offered for sale. The difference between ‘Ask’ and ‘bid’ is called ‘spread’ which represents the demand and supply of the desired currency pair. The ‘bid’ price is lower than the ‘ask’ price.
In Forex Trading There Are Different Types of Spreads
1. Fixed Spread
Which is kept constant and does not depend on market conditions and is the difference between ‘ask’ and ‘bid’.
2. Fixed Spread With Extension
This is where a part of a spread is predetermined while the other part is adjusted by the broker according to the market.
3. Variable Spread
Mostly variable spreads are low, approximately 1-2 pips during times of inactivity in the market. But, can increase to as much as 40-50 pips during times of volatility in the market.
By providing the trading service, the broker takes a small amount in terms of pips of the transaction which is the difference between the real spread and the broker’s one.
• As an example: a trader opens a purchase transaction for a volume of $10,000 Facebook shares, on average a broker will earn around 0.05 percent or 5 basis points as a small percentage.
Forex brokers are facing fierce competition amongst themselves and in an effort to entice traders the additional spreads are becoming smaller, benefiting traders and investor’s earnings.
By using a variable spread graph and other financial analysis charts, traders are more able to determine when the value of a spread reaches its extremes. They can immediately open buy or sell positions at a minimal spread (which is between 0 to 1 pip) and then close on the maximal spread. This will result in a profit equal to the maximal spread value.
XM is a regulated broker and offer a variety of spread advantages for traders. Their platform comes with unique financial analytical charts and tools.
• Over 100 financial instruments to choose from
• Some of the lowest spreads in the industry as low as 0 pips
• Spreads as low as 0 pips for all the major currency pairs
*Trading Forex can be a risk to your investments. You should only trade with money that you can afford to lose.